Written by Nikolay Nikolaev; Originally appeared at A-specto, translated by Valentina Tzoneva exclusively for SouthFront
According to the Chairperson of the Committee on Economy and Energy and former German Minister, Peter Ramsauer, an economic war is being led against the EU’s largest commercial bank – Deutsche Bank.
In the first days of July 2016, the sound of the slap from the British referendum on leaving the EU has still not subsided. Leading German politicians, European analysts and bankers seriously warn of a looming major financial crisis associated with the Italian banks, which have been problematic for years. Benoit Coeur, a member of the executive board of the European Central Bank, rejected the idea of the Italian Prime Minister for recapitalisation of €40 billion to banks in Italy, which have been given the definition of “the weakest banking unit in Europe.” At that point, the Italian Prime Minister lost control and stated that “the difficulties of the Italian banks are miniature compared to the problems faced by other European banks regarding their derivatives.” The risk-ratio of the Italian banks, in his words, is 1:100.
He specifically meant Deutsche Bank, which has from the beginning of the year lost more than half of the market value of its shares. What are the reasons behind these events? Is the European financial system under attack? Why is the leading German bank the target? Is Europe in a hazardous situation? The facts show that certain circles in the United States applied a precision strike against the weak spot of European finances in the growing economic war between the EU and the US, mainly related to TPTI (Transatlantic Partnership for Trade and Investment).
The elephant in the room – the volume of derivatives of Deutsche Bank is €55 trillion.
The popular English idiom about the elephant in the room best characterises our reluctance to see the obvious – the German Deutsche Bank is a step away from the abyss. Even without the conclusion of the International Monetary Fund in July that the bank is the riskiest organisation on the planet with the potential to cause enormous damage to the financial system worldwide, data shows that for a year and a half, the shares of Deutsche Bank plunged from €33 to €10 per share. The problem lies in the colossal size of the exposure of derivatives – about €55 trillion or US$75 trillion, according to Forbes. The fantastic amount equals the volume of the entire global economy and is more than 20 times the annual gross domestic product of Germany. And if those who are aware of the reason for the outbreak of the global financial crisis in 2008 ask the logical question: wasn’t the practice of “casino capitalism” with risky credits through derivatives removed, the answer is: No, it wasn’t.
As it is known, after the 2008 crisis, the powerful transnational banking institutions tacitly gave up on this instrument and for years, the toxic CDO (collateralised debt obligations) were not released anywhere in the world. However, in 2013, namely Deutsche Bank first returned to the practice of placing identical ‘bespoke tranche opportunities’ in turnover and this example was soon followed by BNP Paribas, JP Morgan and Citigroup. The German bank is not only the one which holds the largest amount of derivatives in its portfolio among these banks, but it has also been the world leader for the past year with a 12% share of the total number of derivatives, according to the Bank for International Settlements in Basel. Proceeding from this premise, one can easily understand the controversial remarks of the German Vice Chancellor and leader of the SPD, Sigmar Gabriel, who at the height of the speculative attacks against Deutsche Bank did not defend it. “I do not know whether to laugh or cry about a bank that turned speculation into its business model and now says that it is the victim of speculation,” Gabriel said in response to complaints from the CEO of Deutsche Bank, John Krayan.
Western journalists writing on economic themes found disturbing similarities between the situation of Deutsche Bank and the bankrupted Lehman Brothers. The similarity in units of exposure with derivatives is supported by the ratio of equity to reserves for both banks. As the journalists noted, immediately before the end of its existence, Lehman Brothers had a ratio of 3% and the reduction led to the bank’s bankruptcy. With Deutsche Bank, this number is 3.5% and according to experts’ studies, to stabilise the bank, the reserves should be increased, in the worst case, to 4% of its equity or €7 billion by 2017. This will be particularly difficult given the continuing decline in the shares and accounting for a loss of €7 billion for 2015. In May 2016, the international rating agency, Moody’s, downgraded Deutsche Bank, an event reminiscent to the adjustment rating of Lehman Brothers by Fitch a few months prior to the bank’s bankruptcy. Despite the announced plans for serious spending cuts, including the dismissal of 9,000 people from offices and leaving dozens of markets, experts have expressed concern about opportunities to raise capital, which is key to the survival of the German financial institution.
US-European economic rivalry and the Russian trail
The financial weakness of Deutsche Bank in itself does not explain the scale of the events taking place in front of our eyes, nor can it outline the geopolitical and geo-economic factors which lie in the foundation of the serious difficult situation of the bank. The developments of events related to the inability to secure sustainable growth of western economies, combined with a record increase in the debt burden, intensify the US-European rivalry. After the 90s of the last century and the beginning of the 21st century, the United States and the founding states of the EU saw the expansion to the socialist heritage of Eastern Europe and the influx of capital from the former Soviet Union as a major source of growth. But with Russia regaining its sovereignty and the formation of a coalition with powerful China, aiming to oppose western hegemony, the process was stopped.
These circumstances have led to a narrowing of the geographical areas of operation of the engines of globalisation in the face of powerful financial and industrial corporations and logically increased competition between them. In the pursuit of prosperity for their corporations (expressed in the maxim of Henry Ford “What is good for ‘Ford’ is good for America”), American leaders clashed their interests with the interests of their European partners. The attempt to impose the notorious Transatlantic Partnership on Trade and Investment (TPTI) must be considered in that light. The risk of adoption of the agreement lies in lowering the standards impeding the expansion of American corporations and the seizure of the judicial sovereignty of European countries and transferring it to private American investment arbitrations.
Along with this, there is an ongoing process of reforming the global banking system in the interest of Anglo-Saxon banking corporations at the expense of Europe. With the growth of global financial capital at the end of the 80s, the business model of Deutsche Bank and other smaller banks in Europe relying on cooperation with European industry, became ineffective. This necessitated the strategy of the German corporation to turn it a world investment bank in fierce competition with American players like Goldman Sachs.
And while after the crisis of 2008 the US banks were reinforced with rescue loans, this possibility did not exist for the leading European banks. Valdis Dombrovskis, the Vice President of the European Commission responsible for European finances, gave a comprehensive overview of the clash a few days ago. He made a statement in which he accused the US of reforms imposed on the global banking sector, which lead to a significant increase in capital requirements for European banks. With this, Dombrovskis hinted that there are attempts to place the banks from Europe in an unfavorable position compared to their global competitors.
The positions of the German Vice Chancellor, Sigmar Gabriel, and the French Prime Minister, Emmanuel Valls, for the rejection of the TPTI and resistance to the reform of the global banking sector are a sign that the EU economies refuse to acquire a semi-colonial status. In response, however, the US pressure is going into new dimensions.
It should be emphasised that the very survival of the US financial system is associated with an influx of new capital, of course, at the expense of other players. In fact, an organised attack against the Eurozone is developing before our eyes. By application of a heavy blow to the financial and economic foundation of the EU, the political superstructure and any serious political opposition could easily fall. As it became clear, in this plan, the most suitable target is the unstable Deutsche Bank. This is a logical framework from which we can inscribe the seemingly strange action of the Central Bank of Switzerland at the beginning of the year for refusal to maintain limits on the rate of the euro against the Swiss franc, with which gold and foreign exchange reserves and commercial banks in the country lost between 400 and 500 billion francs denominated in foreign currency. According to Russian analyst, Alexander Zapolskis, such a move is possible only in the presence of a long-term risk forecast for the euro’s stability.
Apart from that, as the weakest link in Europe’s finances, the German bank has another reason to incur the wrath of its American partners. From publications of the Financial Times and Bloomberg from the end of 2015, it became clear that the United States Department of Justice and the Department for Management of Financial Services in New York are investigating Deutsche Bank for an infringement of the anti-Russian sanctions.
According to the investigation of the American journalist, Ed Cesar, published in the New Yorker, two weeks before the United States Department of Justice imposed a record fine of US$14 billion on Deutsche Bank, the Russian branch of the German bank was involved in a scheme where US$10 billion was transferred in violation of the sanctions regime against Russia.
The publication says that through the so-called “mirror transactions” carried out between related parties, shares of companies were purchased backed by Arkady and Boris Rotenberg and others on the US-imposed sanctions lists. The shares were purchased in roubles and were subsequently sold for foreign currency in London. There are ample facts to show that the German bank is working to overthrow the sanctions against Russia. In May this year, Deutsche Bank published an analysis according to which sanctions can be lifted in 2017, which in turn, will lead to the strengthening of the rouble and to inflows of capital.
It is only logical to ask: is there evidence of organised attacks by the US against Deutsche Bank? The events of the last year speak in support of such a thesis.
Chronology of events:
November 2015 – a fine of US$258 million is imposed on Deutsche Bank by the New York Financial Supervision and the Federal Reserve for violating the sanctions regime against Syria and Iran in 1999-2006
January 2016 – The rating agency Moody’s lowered the credit rating of Deutsche Bank from A3 to Baa1 with a negative outlook, together with the rating of another 35 German banks.
April 2016 – In the global media, publications appeared linking the German bank with the so-called Panamanian scandal. According to the publications, Deutsche Bank helped its clients hide income through the firm Mosak Fonseca.
April 2016 – Bank was fined US$340 million by the British financial regulator and US$2.17 billion by the US for manipulation of the inter-bank interest, “Libor,” in the period 2005-2009.
May 2016 – The rating agency Moody’s lowered the credit rating of Deutsche Bank from Baa1 to Baa2.
June 2016 – The US division of Deutsche Bank is subjected to stress tests by banking regulators of the United States. According to the results of the analyses, the bank fails.
July 2016 – The International Monetary Fund released its conclusion to media that Deutsche Bank is the riskiest organisation which can potentially cause serious damage to the financial system worldwide.
July 2016 – International financier, George Soros, began speculative attacks against Deutsche Bank. Soros bought shares in the bank worth US$100 million with the so-called “short-selling” transactions, enabling him to make a profit regardless of the decline in the shares.
August 2015 [translator’s note – perhaps it’s a typing mistake and refers to 2016] – Deutsche Bank is excluded from the index of leading companies in Europe for the first time since 1998.
September 2016 – The United States Department of Justice asked Deutsche Bank to pay a historical record fine of US$14 billion fine in connection with an investigation into sales of mortgage securities before 2008.
October 2016 – Fierce speculative attacks against Deutsche Bank. Hedge funds, all managed by former employees in the banking corporation Goldman Sachs or associated with it including Milenium Partners, Capula Investment, AQR Capital, Citadel, Luxor Capital, Magnetar Capital, Rokos Capiral and others, withdraw assets worth several billion dollars.
The blows against Deutsche Bank put at risk not only the German economy and depositors in the bank. Its decapitalisation is a deadly menace hanging over Italian banks, much of whose financial instruments are held precisely by Deutsche Bank and therefore it applies to the stability of the Eurozone and the future existence of the common European currency. This is, of course, well understood by leading industrial (RWE, E.ON, Siemens) and political (Christian Social Union and Christian Democratic Union) forces that strongly supported the German bank and some politicians, including the Deputy Chairperson of the Economic Committee in the European Parliament, Markus Ferber, and Chairperson of the German Committee on Economy and Energy and former Minister, Peter Ramsauer, even addressed direct accusations against the United States. European financial institutions suffered a double blow from the sanctions imposed against Russia, which deprives them of the huge Eurasian markets. In this situation, there isn’t much space for maneuvers for the European leaders and it is quite possible to observe the strengthening of Russian-European cooperation in the near future, and perhaps the removal of sanctions.